Life Insurance
Categories
- Term Life Insurance
- Whole Life Insurance
Term Life Insurance
- temporary – fixed term
- provides the largest initial death benefit at the lowest initial cost
- can be renewed but nonrenewable are cheaper
- can be converted to whole but nonconvertible are cheaper
- no cash value
- can’t borrow money from policy
Types of Term
- Level term – level amount of insurance for a specified time period
- Decreasing Term – face amount decreases as the amount of loan decreases (Good for home mortgages)
- Increasing Term – face amount increases over time
Options
- Renewable – without having to prove evidence of good health
- Convertible – to a permanent plan without showing evidence of good health
Whole Life Insurance
- level guaranteed premiums until age 100 then cash value equals face value of policy called endow or matures
- permanent insurance with guaranteed cash value
- cash value grows over life of policy
- can not change face value of policy
- may borrow cash value
- surrender or cancel policy you get cash value
- when insured dies beneficiary receive policy value minus any cash value taken out
- can have dividends – called :participating policy – overpayment of premium
Options for Dividends
- Dividend in cash
- Reduce premium
- Purchase paid up term insurance – single premium and cheap
- Accumulate interest which is taxable interest
- Purchase one-year term insurance – bad health
- Dividend pays premium
What can you do with your policy while you are living?
- Surrender the policy for cash (minus surrender charges or borrowed cash)
- Reduce paid up insurance
- Extended Term Insurance – paid up term insurance for the face value for a set period of time (example 100,000 until age 65)
Types of Whole Life Policies
- Limited Pay Whole Life – pay premium for a limited time, premiums will be higher
- Single Premium Whole Life – pay one premium which is less the face value, cash value build up is tax deferred and death benefit is income tax free
- Modified and Graded Premium Whole Life – premium increases over time, normally less than whole life but higher then term insurance
- Variable Whole Life Insurance – keeps pace with inflationary and give current market rates, investment in stock, bonds etc., cash value can increase or decrease depending on the market – they are not guaranteed, investment can increase or decrease death benefits but not below face value
- Universal Life – very flexible you can change premiums or death benefits, guaranteed interest rate and a current interest rate (if current rate is higher it will be paid); you receive an annual statement of benefits and expenses: there are two death benefit options 1) death benefit maintains the same face value but the cash value rises quicker and 2) death benefits increase because policy account value (cash value) is added
- Variable Universal Life – combines variable and universal; very flexible and can rise in cash
- Adjustable Whole Life – can adjust policy in the following ways
- change face amount of policy by increasing or decreasing amounts
- lengthen or shorten the period of protection
- increase or decrease premium amount
- length or shorten premium payment period
Policy Riders
- Waiver of Premium – if you become disabled before a certain age the insurance company will pay premium for 6 month, if disabled longer then premium will be returned; if used with a term insurance policy it is used in conjunction with the conversion feature
- Guaranteed Insurability Rider – this allows you to increase face value without proving insurability
- Payor Benefit – this is on juvenile policies in case parent who is paying premium dies the insurance company pays premium until child reaches 25
- Accidental Death and/or Dismemberment – can increase face value by double or triple the amount if person dies my accidental means
Death Benefit Settlement Option – owner may decide how beneficiary will receive payments:
- Cash or lump sum
- Interest option – receive interest payments only; can be monthly quarterly, annually – you can’t outlive payments, beneficiary can change this to another option, after beneficiary dies the face value goes to their beneficiary
- Fixed period of time payments – pay monthly installments including interest over a set period of time
- Fixed amount option – beneficiary states how much they want to take out on a monthly, quarterly or annual basis, can take out the remain amount at any time
- Joint and full survivor life income option – receive payments for life, after one dies the remainder will receive ½ or 2/3 of the original benefits
- Life income option – pays income for life to beneficiary, the beneficiary’s beneficiary may or may not receive money after the initial beneficiary dies: the initial beneficiary may choose the following options:
- Straight life income - pay a monthly income for life, insurance company keeps any remaining money after beneficiary dies
- Period certain or life income – make payments for life, if beneficiary dies before a specified time period, payments will be made to their beneficiary for the remaining years
- Life income refund option – two types of payouts: 1. cash refund annuity and 2. installment refund annuity. If beneficiary dies, the remaining amount goes to their beneficiary either by 1. lump sum or 2. installments
Annuities and IRAs
- Annuities Terminology -
Accumulation period – during the time the person is making payments and the money and interest are accumulating
Accumulation unit – in a variable annuity you purchase units (similar to shares) units increase of decrease in value daily
Annuitant – person receiving the payments
Annuitize – the process of starting to receive the payments
Vesting – right of employee to any funds contributed on their behalf by the employer if their employment is terminated
1035 exchange form – owner of life insurance my exchange or replace policy with another life insurance or annuity contract without a tax penalty.
Categories of Annuities:
- Non-Qualified Annuities – purchased with after tax dollars, grows tax deferred, when interest is withdrawn it is taxed but not principal
- Qualified Annuities – purchased with before tax dollars – IRAs – they have met the federal requirements and receive favorable income tax treatments
Non- Qualified Annuities
You can contribute 3 ways to your annuity:
- Single lump sum payment
- Level payments (contribute each month)
- Flexible payments (contribute what you can when you can)
Time periods to start taking payments:
- Immediate – put money in and next month start taking payment
- Deferred annuity – take payment at later date, hopefully after 59 ½ so no tax penalty
You may receive your money as the same 5 settlement options of life insurance
Types of Non-Qualified Annuities
- Fixed Rate – receive a fixed rate of interest
- Variable Rate – rate will be determined by the investment
- Market Value Adjusted Annuity – guarantees a specified rate for a period of time until the contract matures
- Equity Index Annuity – guaranteed rate of interest with a possible higher rate depending on the index that it is tied to
Types of Qualified Annuities
- Individual Retirement Accounts (IRA’s)
- Traditional – investment grows tax deferred until you withdraw, 10% penalty if withdrawn before 59 ½ years of age, at age 70 ½ must start to take withdrawals; might be able to take a tax deduction for all or part of contribution if you are eligible: The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $19,000. (2019) The limit on annual contributions to an IRA, which last increased in 2013, is increased from $5,500 to $6,000.
- Roth – contributions made after-tax dollars; your contribution may be withdrawn at anytime tax free, but earnings withdrawn before age 59 ½ will be taxed unless you buy your first house, your disabled, and some other ones
- Tax Sheltered Annuities – for employees of K-12 schools, nonprofit colleges, hospitals, other healthcare organizations and other nonprofit organizations (money is deducted from salary before taxes are paid)
- Simplified Employee Pension Plan (SEP) – Employer can contribute for employee 25% of their contribution or $56,000 which ever is less (2019), contributions are tax deductible to the business and interest accumulates tax deferred. Sole proprietors may use this plan and it has less administration and tax filing the Keogh.
- Savings Incentive Match Plans for Employees of Small Employers ( Simple IRAs) – The employer will match the contribution of employee up to 3% and can drop down to 1% any two out of 5 years or 2% whether the employee makes a contribution or not. Limits change each year on maximum amount.
- Keogh Plan – covers self employed individuals, limits on contributions are the lesser of 100% of include-able compensation or earned income or $56,000 a year, limits change each year, contribution made by employer are tax deductible, employer must make contributions for eligible employees (based on time worked)
- 401 (k) – money that employee contributes is deducted from their pay before their salary is taxed, pretax contributions and earnings grow tax deferred, employer may make a partial contribution up to a specified amount, pre-taxed contributions and earnings grow tax deferred. Maximum amount employee can contribute changes each year